THE SCOPE OF THE SWEDISH TRANSFER PRICING CORRECTION RULE

The correction rule (Sw: “korrigeringsregeln”) in the Swedish Income Tax Act (1999:1229) allows the taxable result of a Swedish company to be adjusted upwards where terms agreed with a related foreign party deviate from what independent parties would have agreed, and the result has thereby been reduced in favour of a party not taxed in Sweden. The burden of proof rests on the Swedish Tax Agency.

Kubal produces primary aluminium under a tolling arrangement with a group company in Jersey, under which Kubal is remunerated for its conversion costs plus a mark-up of 6%. After terminating an unfavourable long-term electricity contract with Vattenfall, Kubal paid damages, deducted approximately SEK 211 million, and received a shareholder contribution of a corresponding, though not identical, amount from its Cypriot parent, which had guaranteed the electricity contract. The Tax Agency considered that an informal understanding with the parent, under which Kubal bore the damages without any compensation affecting its result, shifted income to the parent, and adjusted Kubal’s result upwards by the full amount.

HFD confirmed that an informal understanding can constitute agreed terms for the purposes of the correction rule, and that the rule is not limited to pricing terms. However, drawing on the OECD Transfer Pricing Guidelines, the court held that the arm’s length assessment must be based on an overall analysis of the group’s arrangements. Under the tolling model, Kubal received full cover for its electricity costs, and the risk under the electricity contract was accordingly borne primarily by the Jersey company, which had both the upside and the downside of the contract, and only secondarily by the guaranteeing parent. Since the Tax Agency had neither challenged the tolling agreement itself nor alleged that the damages should have been reimbursed under it, the fact that the termination ultimately benefited the group’s, and thereby the parent’s, consolidated result did not amount to a transfer of income from Kubal to the parent within the meaning of the correction rule. Thus, the correction rule was not applied.